Rising iron ore prices could put budget surplus back on track

An unexpected surge in the global iron ore price has put the budget surplus back within reach.

The iron ore price had climbed from a September low of $US86 a tonne to $US135 a tonne when the Treasurer, Wayne Swan, abandoned his commitment to a budget surplus late last month. It has since risen to $US158 a tonne.

Forecasters from Deutsche Bank are expecting the price to hit $US170 a tonne within weeks.

If sustained, the near doubling of the iron ore price would boost company tax revenues and lead to a surge in mining tax payments, putting government revenue back to near what was forecast in the budget.

In abandoning his commitment to a surplus, Mr Swan stressed he was only doing so because revenues had collapsed. He would continue to restrain spending so that if they recovered a surplus would still be possible.

Mr Swan wrote to ministers after Christmas asking them to find spending cuts in order to fund new priorities. Although the letter did not mention the priorities by name they include the multibillion-dollar National Disability Insurance Scheme and Gonski education reforms.

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The Treasurer recommitted himself to the spending measures in his weekly economic note on Sunday, saying the goal of having Australian schools back in the top five schooling systems in the world by 2025 was "ambitious but essential to ensure our future economic success".

"We will launch the first stage of the National Disability Insurance Scheme in 2013, one of the biggest social reforms our country has seen. For too long, successive governments have shunned the opportunity to reform disability services, leaving people with a significant and permanent disability and their families behind. That's the purpose of a strong, resilient economy - to put in place reforms that ensure we're taking everyone with us."

Another priority might be an increase in the $35-a-day Newstart allowance, now acknowledged by politicians from all sides of Parliament to be too low to live on.

Lifting the allowance by $50 a week would cost $2 billion a year, according to a costing prepared for the Greens by the Parliamentary Budget Office.

Mr Swan is determined that any new measures will be funded by cutbacks to existing programs rather than throwing the budget further into deficit.

He will tell a financial forum in Hong Kong on Monday that a surplus is "unlikely" but that he has put in place budget settings "appropriate for our economic circumstances".

"We've got strong public finances with our net debt only one-tenth of the major advanced economies because we've got a track record of responsible fiscal management. We've taken a balanced approach which supports growth and jobs," he will say.

Deutsche Bank's chief economist, Adam Boyton, said a surge in the iron ore price to $US170 a tonne would most likely be temporary, reflecting restocking in China at a time of subdued supply growth in Australia and Brazil. Importantly neither the coking coal price nor the Chinese steel price was climbing in line with the iron ore price. By the middle of the year the price might fall back.

But if the price did hold near $US158 a tonne, Australian incomes might grow by as much as 6 per cent over the course of the year. If that happened interest rates would be climbing rather than falling in the second half of the year.